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Is Uk Economic Growth Reaching The End?

Author: Paul Flintoft - Director at Money Minds Ltd Published: 30th March 2011 13:17

Paul Flintoft - Director at Money Minds Ltd, provides this insight into his opinion on Economic Growth in the Uk for AboutMyArea/RUGBY.

Is economic growth as we know it over in the UK?  Can the efforts of government and the Bank of England kick-start the economy towards another period of long-term economic growth?  My opinion is no - economic growth as we have known it for over 200 years is over.

This is a fairly profound and potentially depressing statement, so I will offer explanations about why growth is over, what the future may hold and how we can prepare for an environment with negative or stagnant growth.  First, a little background...

Economic growth is driven by two factors: increasing population and; increasing consumption.  The ‘growth' I am referring to consists of the expansion of the overall size of the economy, with more people being served, more money changing hands and the quantities of energy and material goods flowing through it.

Based on the above definition, economic growth cannot continue forever in a world of finite resources.  These resources include land, water, food, minerals and fossil fuels.  So why will growth stop now?

The inevitable economic crisis that began in 2007/2008 marked a permanent and fundamental break from past decades during which most economists adopted the unrealistic view that perpetual economic growth is not only necessary, but possible to achieve. There are now fundamental barriers to ongoing economic expansion, and the world is colliding with these barriers.

This is not to say the UK or other regions, nations, or businesses will never see another quarter or year of growth relative to the previous quarter or year. However, when the peaks and troughs are averaged out, the general trend-line of the economy (measured in terms of production and consumption of real goods) will be level or downward rather than upward from now on.  In the final analysis, this growth will have been achieved at the expense of other regions, nations, or businesses. From now on, only relative growth is possible: the global economy is playing a zero-sum game, with an ever-shrinking pot to be divided among the winners.

Why Is Economic Growth Ending?

There are a number of converging factors that are contributing to end of global economic growth, particularly for the UK and other western economies:

  1. The depletion of natural resources critical to economic growth and maintaining the modern western lifestyle, such as water, food, minerals (e.g. metals) and fossil fuels (e.g. oil and gas).  Some experts believe we have already reached ‘peak oil
  2. Environmental impacts of intensive agriculture, burning fossil fuels and pollution
  3. Financial system failure caused by huge levels of debt coupled with declining / stagnant growth
  4. Rapid industrialisation of developing countries such as China, India and Brazil.  This leads to higher domestic consumption of their own resources and more competition with the west for foreign resources, especially oil

Despite the above factors, some people will argue that long-term economic growth is still possible for the following reasons:

  • Increased agricultural efficiency and technological advances in areas such as water de-salination and green energy
  • New discoveries and exploitation of fossil fuel reserves
  • A growing global population meaning more people to 'sell to'
  • Low interest rates and government stimulus packages
  • Growth in developing nations offsetting slowing western economies

None of the above will abate the inevitable decline of our economy.  Let's look at each point to explain why.

It is worth highlighting at this point that modern energy alternatives such as nuclear, wind and solar power do not yield anywhere near as much easy, high yield outputs as fossil fuels do.  Increases in efficiency and technological advancement will certainly help to slow the decline and create new jobs and business opportunities.  However, they will not contribute to overall growth - just relative growth as old industries and methods decline (i.e. the zero-sum game).  That's not to say efficiency and technological advancements aren't important - they are crucially important to maintaining relatively high western lifestyle levels as we strive to tackle the issues of increasing resource scarcity.

That said, I believe everyone (individuals, companies and governments alike) need to accept that their energy and resource consumption levels cannot carry on like it has in past decades.  A ‘consume and throw away' mentality must be replaced by a 'sustainability' approach.

It is true that some new oil and gas fields are being discovered, however most of these either offer lower quality product that requires more processing and/or are more difficult to extract e.g. deep water reserves.  This means that the cost of producing the end product is higher.  The vast majority of large, easy to extract oil and gas fields have already been discovered and are already being exploited and depleted.

Economic growth and lifestyle is made possible by increasing output relative to population size.  In other words, in a stable population size, if more labour is engaged and more products and services are created for that population, then there is economic growth and in theory, an improvement in lifestyle.  However, if the level of economic output does not increase with a population then there is a relative decrease in economic output per person, usually called GDP per capita.  So having more people to 'sell to' does necessarily create more opportunities for growth in a world of finite resources that are already becoming strained.  This may be an oversimplified explanation, but fundamentally it is true.

Low interest rates and stimulus / bailout packages are necessary in a banking system which requires perpetual growth.  If I had to choose two key components that have enabled the huge growth western economies have experienced over the last century, it is cheap oil and the modern banking system (i.e. fractional reserve banking coupled with a fiat currency).

The modern banking system is inherently designed for growth but cannot function in an economy that does not grow in the medium to long term because it is based on debt that is underwritten on tomorrow's growth.  If this is a concept you do not yet understand, then I recommend you watch the excellent Money As Debt II animation.

The modern economy simply HAS to have low interest rates and government bailouts to keep it functioning.  The problem is that these bailouts create even more debt and the bailout money goes to large banks and corporations, not the lower strata of society.  This centralises power even more and benefits those at the top of the structure much more than those lower down i.e. wealth is not evenly distributed.

It is a fact that growth in developing nations is outstripping more mature western economies.  In the zero-sum game mentioned earlier in this blog, this will serve to balance global growth rates as western economies gradually decline to sustainable levels.  In addition, manufacturing companies in the UK that export to these developing nations will benefit from increased productivity that will help to improve domestic growth figures.  Read the Dual Interest Rate For A Two Speed Economy blog.

On the other hand, accelerating growth in developing nations creates more demand on the earth's resources such as oil, food and minerals.  This growing competition is playing out right now as increased oil and commodity prices and higher living costs.

Conclusion

The industrial revolution that took hold in the early 19th century was really the fossil fuel revolution. It was the first time in humanity that such highly concentrated, relatively easy to access energy was available to use and direct.  From that moment on, there was a race for economic growth and power that was led initially by the UK (and to a lesser extent other European countries) and then the U.S. from the last century.  This race for growth has resulted in an explosion of population and resource consumption that are not sustainable in the long-term.

Long-term is here right here, right now.  The constant growth model we have become so conditioned to accept as the norm is over and the transition into a more sustainable model will not be easy.  Some of the reasons that a transition will not be easy are:

  • The whole global banking system is designed for perpetual growth and without this growth, it will inevitably collapse
  • Western economies have become almost addicted to easy, cheap fossil fuel based energy
  • A whole global infrastructure has been built on cheap fossil fuels and modern banking
  • Many powerful groups across the world have vested interests in the proliferation of the current growth model e.g. large banks and corporations (why do you think politicians constantly sell the idea of growth at all costs?)
  • People as a whole don't like change, especially if change is perceived to be going backwards

The reality is we have a choice: we can either deny the issues at hand and continue to travel down a path that is doomed; or we can embrace change and put as much effort into sustainable living as we have put into growth for the last 200 years.

If we chose the first route, the result will be escalating civil conflict and perhaps even more severe outcomes such as war, famine and disease.  If we choose the second route, then there is no reason why we cannot build a quality of life for everyone that is even more fulfilling than where we're at now.  A ‘rat race' mindset can be replaced with a more conscious mindset where people are more in tune with each other and the environment.

www.moneyminds.co.uk

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